tv Banking and Finance CSPAN August 23, 2014 11:35pm-11:56pm EDT
"entourage" guys which is called "ballers" which is about aging football players set in miami. it is quite poignant about the end of people's careers and how they evolve. we have a show called "the brink." i liken it to "mash." "leftovers," a kind of metaphysical -- you have seen the trailer. this may, "the normal heart," directed by ryan murphy, starring julia roberts. the blessing for us is the line
out the door of talent and artists who want to be part of the network and our job is to keep them coming in and make sure we continue to create an environment where they can do their best work. >> just between us girls, brad pitt "true detective"? >> a lot of interesting people are in line to do next season. stay tuned. >> thank you, everybody. [applause] oat the newdon york ideas festival.
this is 20 minutes. >> we have 16 minutes and 37 seconds, which is a version of speed dating. we will do our best to try to do about five years of financial history in this time. everybody knows who james is. we have known each other a long time. let me find in and go back and we will do this quickly. looking back at history, a lot of chatter about what could've been done differently. i am going back to the 1990's to the time of glass-steagall being repealed, to the time when a decision was made not to regulate over-the-counter derivatives, decisions not to impose tougher capital requirements on investment banks.
if you take that time, the 10 years or so, what should we have done differently? >> great to be with you again. we have known each other a long time. for those of you who stayed for the banking portion, we appreciate that. i thought they were getting prizes outside as everybody got up to leave. i will try to address this in 45 seconds. the country went through a period of tremendous prosperity. there is a rate wealth effect from that fall is a great wealth effect from that. it was promoted by successive governments and by the banks. the banks were complicit in adopting underwriting standards. if the economy ever turned, it
will lead to disastrous results. the banks themselves leveraged of their balance sheets so that there were some banks that were leveraged 60 times. if they are wrong 1.5% of the time, they have wiped out their capital. not everybody is that good when things get grim. very poor underwriting standards, overleveraged banks, a lot of people purchasing real estate who could not afford it in a down cycle and eventually, you headed down cycle. it is ok because the banks have enough capital liquidity. guess what, they didn't. everyone has seen "it's a wonderful life." that understanding is what drove the crisis.
the complicated story. >> that is a liquidity crisis, not a solvency crisis. the bank simply being bankrupt. which was it in this case? was it all liquidity? >> what happened was you had enough balance sheets that were written off which destroys the capital buffer. institutions or individuals see the capital of their bank approaching zero, either this thing will turn around or the bank is out of business. i want my money back and i will get it back sooner. that starts a run on the bank. the customers say, we could be next. you get this cascading thing.
it began with poor asset quality leading to a crisis of confidence, leading to i want my money back, leading to a systemic run on the financial system. that was the single bravest challenge to our financial system we have had since the great depression. >> should be have repealed glass-steagall? should that have been repealed? >> no. if you step back from it and look at the broader consequences for the financial system, many of the institutions got into trouble. lehman brothers got into trouble. wacovia bank got in trouble. >> what about regulating the derivatives? >> you can always second-guess.
i am avoiding your question. [laughter] where do we go from here? that was pretty swift. >> i will give you another question to avoid. let's fast-forward and get into the followed 2008 and the crisis hit the fan -- in the fall of 2008 when the crisis hit the fan. lehman brothers, the decision was made not to save it. in your mind, was that the right decision? lehman brothers, handled right or handled wrong? >> i think they made the call with the facts they had at the time. this government should not be the. for every financial institution out there that would encourage
the reckless behavior we are trying to avoid. reckless behavior we are trying to avoid. the government was making a courageous statement that has been second-guessed many times. i was sleeping on the couch in my office many times. we are working continuously for six weeks. you are making hundreds of decisions every day. you can second-guess a bunch, but in aggregate, i think they did a phenomenal job. >> they did not save lehman brothers, which meant aig went down. >> they did not have a book on the shelf. when you're presented with the facts in front of you, you have to act based on your experience. look at where the economy is. compare this to the great
depression. that started in 1929 in unemployment peaked at 32%. it took 12 years for unemployment to get below 10%. five years after the great recession, this economy may be the strongest economy in the world right now. unemployment is down around 6%. i think they did a lot of things right. i am australian, i only know two baseball players. [laughter] the chairman of the yankees was the guy who spent his life
studying the great depression. >> nonetheless, the country is not in love with bankers, except for you and me. a lot of acrimony. >> i did not know that. [laughter] >> i am here to speak truth to power. the question is, was there a way to avoid that? with the tarp money, should have gone in on tougher terms? should the shareholders have had to give up more? why did nobody go to jail? >> can we hold that one for a
minute? >> tarp was inspirational. you've of a couple of financial institutions fail and you have a bunch of other financial institutions lined up like the planes landing at newark airport. the government steps in and says, ok, credit quality, capital, crisis of confidence. you cannot change the credit quality. the government intervenes by saying, not just the week bank gets capital, but everybody gets capital. you all did it on the same terms. with it came certain obligations. interest rates, we pay 21% effective interest on the capital.
it was a good return to taxpayers. we went out to the market and raised the money. strengthened the institution. contrast that with europe. they did not require people to take capital. nobody thinks they will have to raise it. the european banks are still working through the issues our government solved in october of 2008. why nobody went to jail? i used to be a securities lawyer in australia. as far as i know, you have to commit a crime. the fact of the matter is, and i'm not talking about the ponzi schemes, bad judgment, incompetence, negligence, greed, these might be socially unacceptable. they lead to a lot of personal embarrassment. but they are not criminal offenses. we have laws on the books for a
reason. in the rare instances people have gone to jail, but taking people to jail for messing up in their jobs, you would be locking a lot of people up. >> let's move on from that. let's talk about the present and the future. we had dodd-frank pass. one of the questions about dodd-frank, does it take to big to fail off the table? does it provide a way to wind down the feeling institution without having to do a lot of unnatural acts? is there an orderly way to deal with an institution that is insolvent? >> just to broaden it a little bit, i think of it as three
pieces. up front, banks will raise liquidity and capital and cut their leverage. if you will see your doctor, diet and exercise. put the preventative measures up front. on the backend, there is an orderly resolution authority so we do not have this lehman brothers type failure where nobody knows who owns what. thousands of pages long, but the barriers are up front. along the way, we get an annual health check up. we see our doctor the federal reserve. you pass or you don't pass.
>> that is been happening with banks since the federal reserve was created. >> i do not think they were testing bank's viability in a severely adverse scenario. the parameters were much worse in 2008. i was criticized -- i thought the risk of another financial crisis of happening in my lifetime was near zero. somebody said, obviously, he has some big illness because he will not be around for a while. [laughter] not true, by the way. in the last 200 years, there is been a financial crisis of sorts every 14 years. >> this is a pretty extraordinary one. let me move on. the question gets raised, and a
bank like morgan stanley compete under these kinds of regulatory restrictions when you have a whole bunch of other firms running around outside the system, hedge funds and private equity funds and pools of capital not subject to those restrictions? can you compete? do you stay is a bank holding company? do you go back as being an investment bank? >> the investment banking industry has disappeared. there are some boutique investment banks. large scale investment banks will not exist in the future. there will be bank regulated, and they should be. there should be one governance process. can we compete?
absolutely. we purchase a business called smith barney from citigroup. he will break $2 trillion of financial assets in a business. phenomenal business. low capital usage, great returns. every institution has to look at where they can get the returns. and to adjust their business model accordingly. >> you are moving away from the capital intensive, highly regulated investment banking businesses? >> i would not say we are moving away from it. we have added the ballast which gives us stability. the other half is the engine room. we have a business model which mixes the best of both worlds. time will prove if that is the case.
>> new forms of lending going on. no bank in the middle, peer-to-peer lending. there are some credit qualifications on both sides. the bank that provides the credit evaluation is out of the mix. is that a good thing or a bad thing? >> society started off with the barter system before. the first bank was formed -- i think it is great. innovation, the payment system, these are all innovations. if there is a market for it and they can do it efficiently and manage the credit risk, god bless them. >> is it going to end in tears? with a set of problems emerging?
>> nothing is risk-free, particularly around money. again, if people understand the credit risks they are taking. what really matters is getting your capital back first. >> spoken like a true banker. i have a lot more questions, but no more time. [applause] research andrew mcaffe and the new machine age. >> we have two very fun folks. we have andrew mcafee, who has one of the hottest books on the market right now.
with david brooks, columnist for "the new york times." at our opening dinner, david gave a riveting, sobering talk about the subject happiness. in the back of my mind, i had the pharrell williams song going on. the moral versus the economic as we look at the machine age that is coming. david brooks. >> i ask short questions. machines think, humans think, what is the difference? >> i think we both wish that i were thomas these days. you think you have written a